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Trump Goes for Mexico's Jugular

WHO is going to be the winner of the upcoming election for the US Presidency in the month of November? asks Gary Dorsch at Global Money Trends.

Ignore the pundits and polls. If you want to know which candidate will win the presidential election, the traders in the US stock market or the on-line gamblers at Predictit.com will let you know.

That's right, it turns out that the S&P-500 index has "correctly predicted" the outcome of 19 of the past 22 elections. Past history says that if the S&P-500 index posts positive returns in the three-month period before the vote for the White House, the incumbent party – in this case the Democrats – almost always wins the election. In contrast, if stocks fall in that period, the non-incumbent party is likely to retake power and move into the White House.

There are also bookies, based in London and Ireland, such as William Hill, Betfair and Ladbrokes, that set a daily betting line on political outcomes. Right now, the consensus among the UK bookies finds the Democrat as the clear favorite to win in November with a 65% probability and Trump at 35%.

However, on-line gamblers at the Wellington, NZ site, predictit.com have lowered Hillary Clinton's odds of winning the White House to 56-cents on the Dollar, compared with 70-cents a month ago. The value of contracts that are still open and betting on Trump is around $450,000.

However, there is another market with much deeper liquidity, where traders are betting on the outcome of the election. In this market, the daily trading volume is around $135 billion a day and is the most actively traded in the emerging markets, and is used as a general proxy for risk.

It's the Mexican Peso, and for most political pundits, it's nowhere to be found on their radar screens. Yet its an insightful market to watch in the months ahead, in order to get a early clue about the eventual outcome of the November 8th election – specifically, whether Mr.Donald Trump can beat the odds, for a second time this year.

For almost a year, Mr.Trump has made his promise to build a wall on the US's southern border with Mexico, the centerpiece of his campaign. When asked how he planned to pay for it (estimated at $10-billion), Trump has bragged that he'd make Mexico pay for it. Mexican officials from their president down have publicly scoffed at the claim, and Trump's critics have chalked it up as one of his meaningless rhetorical flourishes.

However, in an April 5th memo, Trump said he'll take aim at the jugular of the Mexican economy – remittances.

On Day 1 of his presidency, Mr.Trump would propose that no alien may wire money outside of the United States unless the alien first provides a document establishing his lawful presence in the United States. Then, according to him:

"On Day 2, Mexico will immediately protest. They receive approximately $24 billion a year in remittances from Mexican nationals working in the United States. The majority of that amount comes from illegal aliens. It serves as de facto welfare for poor families in Mexico. There is no significant social safety net provided by the state in Mexico..."

On Day 3, Mr.Trump would tell Mexico to contribute however-many billion to the United States to pay for the wall.

The proposal would jeopardize the biggest stream of cash into Mexico's struggling economy. Nearly $25 billion was sent home by Mexicans living abroad in 2015, mostly in the form of money transfers, according to the Mexican central bank.

In his memo, Trump said that "the majority of that amount comes from illegal aliens." But a Government Accountability Office report in January said that it is difficult to track how much money illegal Mexican immigrants are sending versus those working legally in the United States. Furthermore, it could by sidestepped. Forget wire transfers. Illegal aliens could buy pre-paid Visa cards with cash, no trouble. Toss that in the mail and send it south.

The money that Mexican workers send home from the United States is Mexico's top source of foreign income and represents more than twice the value of crude oil exports. A Forbes story quotes José Alfredo Coutiño, Moody's Director for Latin America, as saying the remittances which have come under fire by presumptive Republican presidential nominee Donald Trump account for a lot of money in Mexico.

"Remittances surpassed crude oil revenues for the first time in history in December of 2014. Since then, remittances have continued to increase even to the point of representing more than twice the value of crude oil exports since December of 2015."

That's partly because oil production in Mexico has fallen by 1.3-million barrels per day since 2003, and the price of crude oil has dropped in half compared with June 2014.

In Q1 of 2016, some $6.2-billion worth of remittances was sent to Mexico. During that same time frame, Mexico pulled in $2.6bn in oil exports revenue. In 2015, according to Forbes, remittances to Mexico totaled $24.8bn, oil exports revenues were $18.7bn, and tourism was $17.4bn. However, the Republican presidential candidate Donald Trump has threatened to cut off remittances as part of his proposal for Mexico to pay for a border wall to be constructed.

Since Mr.Trump won the primary in the state of Indiana, on May 3rd, he effectively locked up the Republican nomination and the Mexican Peso has been sliding on a slippery slope. After moving alongside the price of Nymex crude oil for more than 1.5 years, Mexico's Peso has suddenly divorced itself from crude oil prices, and has turned 8% lower, even while crude oil prices have continued to climb higher, and remain lofty near $48 per barrel.

Mexico's central bank hiked its overnight lending rate target by +50-bps on Feb 17th to 3.75%, during an unusual and unannounced policy meeting. The bank also intervened directly in the forex market by selling US Dollars for the first time since 2009 to support the Peso, which plunged to all-time lows of 5.2 US cents.

Yet despite these support measures, Mexico's Peso has begun to sag again. The weakening Peso is partly blamed on a recent +20-basis points uptick in short-term US 2-year T-bill interest rates, as the Fed is expected to hike the fed funds rate to 0.625% in June or July.

But also, Mr.Trump has surprisingly edged ahead of Hillary Clinton in 3 of the past 5 opinion polls, and has moved into a virtual tie at 43% each. That has gotten the attention of Mexico's political leaders and foreign currency traders.

On May 19th, alarmed by the slump in the Peso, some of the members of Banco de Mexico said they are ready to hike interest rates before the Fed moves in June, according to the minutes of their last policy meeting. Policymakers voted 5-to-0 to keep their benchmark rate at 3.50% at their May 5th meeting.

However, the speed of the Peso's recent tumble has sparked speculation the central bank could intervene to cushion the currency's fall with US Dollar sales. Yet central bank intervention won't be able to stop the Peso's slide if Mr.Trump begins to move decisively ahead of Hillary Clinton in the polls.

GARY DORSCH is editor of the Global Money Trends newsletter. He worked as chief financial futures analyst for three clearing firms on the trading floor of the Chicago Mercantile Exchange before moving to the US and foreign equities trading desk of Charles Schwab and Co.

There he traded across 45 different exchanges, including Australia, Canada, Japan, Hong Kong, the Eurozone, London, Toronto, South Africa, Mexico and New Zealand. With extensive experience of forex, US high grade and corporate junk bonds, foreign government bonds, gold stocks, ADRs, a wide range of US equities and options as well as Canadian oil trusts, he wrote from 2000 to Sept. '05 a weekly newsletter, Foreign Currency Trends, for Charles Schwab's Global Investment department.

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